This Week:A Bad Equilibrium & How Speculative Distortion Ends
Fed policy is no longer relieving constraints; it is introducing distortions. That – not the exact level of wage growth, inflation, or unemployment – is the primary reason to normalize policy, and to start along that path as soon as possible. Current Fed policy discourages saving, while diverting the little saving that remains toward yield-seeking malinvestment. The difficulty with creating a bubble of speculative distortion is that there is always hell to pay, and once valuations have already been driven to extreme levels, that hell is baked in the cake. It can’t be avoided, and once investors have shifted toward risk-aversion, history indicates it can’t even be managed well.By John P. Hussman, Ph.D.
President, Hussman Investment Trust